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Wall Street Blocks Hoenig’s Key Policy for Bank Regulation

July 12, 2017 (EIRNS)—For three years, Federal Deposit Insurance Corp. vice-chairman Thomas Hoenig has fought for a higher, 10% capital-ratio requirement for U.S. banks, and has fought against European Central Bank and Bank of England attempts to impose the Basel 3% capital ratio of Europe’s big banks, on the United States, which has a 6% requirement under Dodd-Frank. More recently Hoenig has hoped to be appointed the Federal Reserve governor for bank regulation, a position created by Dodd-Frank but never filled until now.

With Wall Street guiding Treasury Secretary Steven Mnuchin’s recommendations to the White House on bank regulation, Hoenig and his signature bank capital policy are both being pushed aside. Mnuchin’s second (of four planned) recommendations, released July 10, is a push for relaxation of capital standards (i.e., an increase in debt leveraging) for the big Wall Street and other systemic banks. This, although only one of the Wall Street "big six" has even attained a 5% capital ratio (20:1 debt leverage) as of the most recent bank "stress tests."

Mnuchin’s July 10 report claims that the biggest U.S.-based banks, with the capital they have now, "are projected to be able to withstand almost $600 billion in losses generated by a period of severe distress, like a financial crisis, and still have enough capital to continue to lend and provide critical services to the economy." This falls apart, when one looks at the "big six" alone: They list more than $10 trillion in assets, and, as Hoenig has noted, lost more than 6% of assets in the 2008 crash, or more than $600 billion. Their losses alone in a new crash could easily wipe out capital equivalent to that claimed by Mnuchin for the entire banking system.

At the same time, the Trump White House has announced its nomination of Randal Quarles as the Fed governor overseeing banking regulation. Quarles worked in the Bush Treasury Department under Hank Paulson, and has been in private equity since.

With a general bubble of corporate, auto, and credit card debt showing rising defaults and heading for collapse, the biggest U.S. banks are seeking clearance to "leverage up," claiming it will allow them to lend more. They are also demanding to be allowed to "compete evenly" with the big European banks, notorious zombies with little capital and large bad debts, kept alive by the European Central Bank and government bailouts.

Wall Street makes these demands even as they have been exiting auto lending, and packaging corporate "junk" debt to dump it off around the world. They took the same actions with mortgage-securities debt before the 2007-08 crash, and investment banks were also permitted to leverage themselves up to 35:1; Lehman and others went even beyond that.